The following is a guest blog commentary appearing on the Supply Chain Expert Community web site.

It seems that each passing week brings our community fresh new reminders on the existence of potential risks in the supply chain as well as the upstream and downstream implications on business outcomes. This week alone, there are two additional streaming events that are capturing the interest of business media, and should capture the continued following of supply chain cross-functional teams.

In the automotive sector, a recent fire that occurred at an Evonik Industries AG manufacturing plant in Marl, Germany has had cascading impacts related to the overall global supply of nylon-12, a rare resin that is utilized in the manufacturing of fuel tanks, brake and fuel lines. Nylon-12 has been extensively used because of its superior capabilities to be highly resistant to the corrosive effects of gasoline and brake fluid.  Evonik represented over 25 percent of the global supply of the building block specialty resin that eventually makes-up nylon-12, and was also a supplier to another nylon-12 producer, Arkema SA. The Wall Street Journal reported that Evonik executives estimate that it may take more than six months before repairs can be made and production can resume.  Industry observers and participants estimate that there may be no more than one to two months of available inventory in the pipeline, causing industry wide concern, with the potential of disruption of multiple auto final assembly plants in the coming weeks.  The scope of this disruption rivals the same magnitude of the paint pigment disruption that occurred as a result of the tsunami in Japan, or the disruption of upwards of 30 percent of hard disk drive components capacity caused by the floods in Thailand.

Earlier this week, in a rare move, executives from eight separate auto producers and 50 parts suppliers met in Detroit with the purpose of drafting an alternative specification and sourcing plan in order to seek an interim replacement for nylon-12. In the spirit of six sigma crisis response, six joint membership committees were formed to develop, evaluate and fast track an industry-wide substitute. Any final outcome as to industry-wide mitigation or impacts to business results are yet to play out.

In the pharmaceutical and drug segment, Johnson and Johnson announced its Q1-2012 fiscal operating results this week which included even more stark reminders of the impacts of a combination of quality process breakdowns and supply disruptions.  J&J’s McNeill Consumer Healthcare unit, responsible for the production of brand names such as Tylenol, Motrin and Benadryl, continues to deal with the impacts of cascading quality snafus and product recalls that forced the closing of an entire manufacturing facility. The unit has been operating under an FDA Consent Decree affecting 3 manufacturing plants, including the Fort Washington Pennsylvania facility which was shutdown for a complete overhaul over a year ago.  In its recent briefing to analysts, J&J executives disclosed that Fort Washington, originally planned to resume operations late this year, may not be able to resume production until 2014.

A blog commentary penned by Ed Silverman posted on the Pharmalot blog titled, Gang That Couldn’t Shoot Straight, draws an analogy of completely renovating a gourmet kitchen to produce “a shiny new bistro ready for an Iron Chef showdown “only to discover a conundrum that the homeowner is using the same recipes geared for the older worn down kitchen. Silverman continues: “ (But) rebuilding an entire plant takes a lot of effort and tech transfer can be an imperfect science if the underlying processes were problematic in the first place.”

While all of this is occurring, McNeill sales are estimated as falling over 2 percent during this past quarter as consumers turn to alternate brands for their medication needs. J&J has also be forced to spend additional monies in market education initiatives to restore trust in its OTC brands

On the pharmaceutical side of J&J, the supply of the cancer fighting drug Doxil remains on severe allocation caused by the unexpected shutdown of J&J’s prime contract manufacturer for this drug.  The result has been over an 80 percent decline in revenues of this drug.  J&J executives do not anticipate Doxil to be available until late 2012 while restoring a reliable supply of the drug remains “our most urgent priority.” J&J further indicated that it was pursuing both longer-term as well as shorter-term options to restore supply.

So what can readers’ takeaway from these latest reminders of unplanned disruption and impacts on business results.

• First, identification and early warning visibility to disruptive and costly supply risk must be extended to multiple tiers of the supply chain.
• Efforts of cost control directed at consolidating suppliers must also factor important considerations of sole supply risk.
• When an incident occurs that has the potential to severely impact upstream and downstream supply and/or demand, marshal required cross-functional and cross-business resources and get all pertinent information into the process of mitigation response. Physically rebuilding or overhauling a plant or contract manufacturing facility or production line must also include a re-visit of underlying process, technology, people and decision-making processes that are attached.

Supply chain risk mitigation is not a singular supply chain process, it is rather an enterprise-wide response to a significant business problem.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

Two massive earthquakes triggered back-to-back tsunami warnings for Indonesia and surrounding Indian Ocean waters this morning, local time, sending panicked residents fleeing to high ground in cars and on the backs of motorcycles. The 8.7 magnitude earthquake that struck off Indonesia, raised fears of another huge tsunami but authorities are currently indicating there are no reports suggesting a major threat.  That quake was followed by an 8.2 magnitude aftershock, which many would characterize as fairly severe.

According to the US Geological survey, the initial quake struck 500km southwest of the city of Banda Aceh, on the northern tip of Indonesia’s Sumatra Island, at a depth of 33km.  Indonesia’s governmental authorities have indicated that power was down in Aceh province and people were gathering on high ground as sirens warned of the danger. A tsunami warning was issued from the Pacific Tsunami Warning Center in Hawaii advising countries all along the rim of the Indian Ocean, from Australia and India to as far off as Africa, that a tsunami could be generated. Thus far, no activity has been reported.

This incident is yet another indication of heightened major earthquake activity within Asia coastal regions. The latest was a series of severe quakes that struck off the coast of Japan in March.

Supply chain teams should continue to monitor this situation for any further developments.  It seems  that all of us in the global supply chain community have gained a new sensitivity to the occurrence of these events.

Bob Ferrari

Troubling issues concerning aviation and aerospace supply chains are not just confined to Boeing.  Rival Airbus has also been dealing with its own challenges, and this week presented yet another concern related to its massive A380 jetliner shown in our pictorial.

In past weeks, after the appearance of cracks appearing in parts of the wing of the A380, European air safety officials ordered an inspection of the entire fleet.  It has since been reported that these minor cracks were found in almost all of the fleet.  Airbus claims it will take considerable time to resolve the problem.

Readers might also recall the potentially devastating blowout of Rolls Royce Trent 900 engine in September 2010 involving a Qantas Airways A380, forcing an emergency landing in Singapore, and subsequently the grounding of the entire fleet for weeks. A result of that incident was a confidential settlement between Qantas and Rolls Royce involving a reported $100 million. Other reports indicated the cumulative costs to Rolls for having to fund the inspection, repair and airline damages of all engines throughout the supply chain to be roughly $190 million.

Last July, an A380 flying from Singapore to Hong Kong was forced to return after an engine shutdown.

This week provided yet another incident.  A Singapore Airways A380, this time traveling from Singapore to Frankfurt, with 430 passengers on board, was involved in an engine incident forcing the aircraft to return to Singapore after about three hours of flight.  Fortunately for the plane’s many passengers, the aircraft returned without further incident and passengers were transferred to another aircraft. Reports indicate that an engine surge in the number three engine, which was also a Trent 900 Series, was the probable cause.  Singapore Airways issued a statement indicating it was working with both aviation authorities and Rolls Royce to determine cause and probable actions.

Airbus’s new composite materials A350 passenger jet development program, a response to the existing Boeing 787 Dreamliner has also suffered a series of recent setbacks. The company made the decision to delay the plane’s introduction from late 2013, to the first half of 2014 by concluding that certain supplier components were not of acceptable quality and it was necessary to “stop and fix” the program.

In the world of aerospace, and its associated supply chains, risks incur both in the product development, production and after-market phases of the aircraft’s product lifetime.  As manufacturers continue to drive more advanced engineering and innovative, but complex components, the risks get higher and implications to highly stressed supply chains magnify even further. It seems that no manufacturer nor supplier is immune and the stakes continue to get higher. Now more than ever, broad visibility and supply chain agility are the competencies for meeting business needs.

Bob Ferrari

Just about one year since the first anniversary of the devastating 9.0 magnitude earthquake that struck northern Japan, there are yet new earthquakes occurring in the region.  At least three new earthquakes impacted areas of Japan earlier today.

According to the Japan Meteorological Agency, an initial magnitude 6.8 earthquake occurred near Hokkaido Island, 146 miles south of Kushiro in the far northern region. This quake occurred six miles below the sea surface and triggered a small tsunami that caused minimal damage. Initial tsunami warnings forced evacuations of some coastal regions.

A second 6.1 magnitude quake occurred off the coast of Chiba just east of Tokyo, where a moderately strong 5.7 quake had occurred three hours earlier.  The 6.1 quake was estimated to be 9 miles below sea level.  Two runways at Tokyo’s Narita International Airport were temporarily closed for inspection along with suspension of bullet train service.

An International Business Times posting provides video and news reporting of these incidents.

Reports from each of the impacted regions initially indicate minimal property damage.

These continued earthquake occurrences add more anxiety, not only for the people of Japan who have already endured the suffering of the aftereffects of last year’s disaster. but also manufacturers and their supply chains originating from the impacted regions.

Supply chain teams need to continue to closely monitor Japan in light of continued occurrences of tremors and aftershocks.

Many consistent themes occur in our continuous commentary on Supply Chain Matters and one of the most consistent over these past months has been the supply chain setbacks within Boeing’s infamous 787 Dreamliner manufacturing program. One of the most innovative aircraft in terms of bold design was burdened by a supply chain sourcing strategy that has provided multiple setbacks and frustrations.

In August 2010, Supply Chain Matters revisited the admission by Boeing’s CEO of the key importance that Boeing had on its supply chain capability, which was a statement of the obvious. August also provided yet another setback, the admission that important issues with engine supplier Rolls Royce and workmanship problems at Alenia Aeronautica led to a decision to postpone delivery to first initial customer All Nippon Airways (ANA) to the end of 2010.  ANA has 55 Dreamliners on-order. In November, an in-flight incident of an electrical fire and power failure on one of the 787 test aircraft caused another unanticipated and potentially serious delay that pushed back first customer delivery to Q3 of this year.

In May and June of this year, a political eruption occurred when the U.S. National Labor Relations Board (NLRB) filed an unfair labor charge against Boeing in April, related to the company’s intent to open and operate a second final-assembly production line in South Carolina. The decision was based on comments allegedly made by Boeing’s senior management that indicated that the second production line was payback for past labor strikes by Boeing’s union members in Seattle.  The NLRB claimed that Boeing illegally punished its labor union by building the 787 facility in a non-union state, and proposed that the second facility be opened in Washington state. A political firestorm then developed as Boeing motivated national; Republican legislators to shout government intervention. The Boeing PR machine cranked into overtime on developing a Wall Street Journal editorial, authored by CEO Jim McNerney, claiming that Boeing is pro-growth and not anti-union. Mr. McNerney stated in the commentary, “The NLRB is wrong and has far overreached its authority. Its action is a fundamental assault on the capitalist principles that have sustained America’s competitiveness since it became the world’s largest economy nearly 140 years ago.” Mr. McNerney continued with the argument that government overreach could accelerate the flight of middle-class American jobs. Boeing has further stated that it will fight the forced relocation all the way to the Supreme Court, if necessary.

In spite of the PR, the issue of operating the second final assembly line in South Carolina is still in doubt, and the judicial and appeals process adds the potential for more delays.

For the past two weeks, Boeing has been in the process of conducting final certification and acceptance testing of the initial 787 in conjunction with ANA.  The testing process is being conducted in Japan and on Asia air routes, allowing pilots and engineers to mimic ground and air operations. Reports indicate that ANA will begin operation of the 787 initially on domestic routes before moving to international routing.  Reports have been that both Boeing and ANA teams are excited about the testing and pending certification. We checked Jon Ostrower’s Flightblogger and noted a posting that indicates that the timeline of Boeing’s announcements have been very carefully worded, and according to Ostrower, “Either Boeing has decided to add a bit of variety to its wording for 787 first delivery or there is ground work being laid for a delivery after September.”

An article in the Wall Street Journal on July 14 notes more disappointing supply chain news.  Boeing acknowledged that it was halting final assembly of 787’s at the factory in Everett Washington for about a month, to address termed supply chain issues. Ostrower penned another entry quoting Boeing wording that indicates “supplier spot shortages’ and “remaining engineering changes” were the motivator for this newest delay.  Boeing additionally stated that it will comment on any impacts to all downstream deliveries during its July 27 Q2 earnings report.  There has also been speculation as to whether some of Boeing’s suppliers were seriously impacted by the devastating earthquake that occurred in Japan in March.

Boeing faces tough supply chain challenges regarding the 787.  The program is over three years late in deliveries, and the operation of a second final assembly facility to help catch-up on production remains unresolved.  Suppliers have been patient and so have 787 customers, but patience is often fleeting. There is a limit to financial incentives or penalties.

While supply and other visible issues continue, Boeing’s attention is drawn away from other programs.  A previous Supply Chain Matters commentary noted speculation that decision delays on the long-term design of the popular 737 workhorse has led to explosive order rates for the Airbus 320neo aircraft.

We all want and need Boeing to succeed, but events are not lending themselves toward supply chain or customer excellence. Any sustained manufacturing resurgence for the U.S. needs to have Boeing as a key contributor.

As a final note, we continue to reach-out to Boeing to perhaps gain another perspective, but our efforts have not yielded any response.

Bob Ferrari